There have been an equal number (seven) of upgrades and downgrades from the 7 stockbrokers monitored by FNArena so far this week.
In the good books
Arena REIT (ARF) was upgraded to Outperform from Neutral by Macquarie
Arena REIT is upgraded to Outperform from Neutral, as Macquarie considers the stock defensive from an income and cost perspective amid solid fundamentals.
The tenant base continues to benefit from buoyant operating conditions and additional support is now expected for the early learning sub-sector via the Labor Government policy to lift the maximum childcare subsidy rate to 90% for families for the first child in care. Target is reduced to $4.61 from $4.90.
Cooper Energy Limited was upgraded to Accumulate from Hold by Ord Minnett
Increased output at the Orbost gas plant has meant Cooper Energy has exceeded contract nominations with up to 20 terajoules a day now sold into the spot market at elevated prices.
Ord Minnett believes the business is well-placed with its exposure to east coast gas markets amid growth options for a number of assets in various stages of development. Rating is upgraded to Accumulate from Hold and the target is lifted to $0.33 from $0.32.
Domino’s Pizza Enterprises Limited (DMP) was upgraded to Buy from Accumulate by Ord Minnett
Domino’s Pizza Enterprises has outlined a continuation of its strategy for Asia with a target for net store growth of 9-12% per annum. No trading update was provided.
Delivery times in Japan have improved with greater store density. While inflationary pressures are significant, the company has managed to keep prices below peers.
Advertising in Japan is considerably higher, and management does not expect this to fall to Australian levels. Nevertheless, as scale builds, margin should expand as a proportion of network sales.
Given the recent de-rating of the stock, Ord Minnett upgrades to Buy from Accumulate. Target is steady at $99.
Healius Limited (HLS) was upgraded to Buy from Neutral by Citi
Citi lowers its target price for Healius to $4.30 from $4.70 following a trading update to the end of May that revealed a covid-induced slowing for core pathology and imaging.
Following recent share price weakness, the broker raises its rating to Buy from Neutral. This move comes despite the possibility of further weakness around FY22 results, the analyst explains, as the market comes to grips with permanently lower PCR testing.
Citi expects expect FY24 to be a more normal earnings year.
National Storage REIT (NSR) was upgraded to Neutral from Underperform by Macquarie
Macquarie reviews the investment outlook, assessing the storage fundamentals remain solid. Downside risks include cost inflation in construction, which may affect returns from developments and refurbishments. Also interest expenses are increasing.
Given the current valuation, Macquarie considers the risks are balanced and upgrades to Neutral from Underperform. Target is reduced to $2.39 from $2.47.
Scentre Group (SCG) was upgraded to Neutral from Underperform by Macquarie
Macquarie remains cautious about the balance sheet as gearing is 39% and there is an interest cost headwind over FY22-FY24. Still, with the stock trading on 14x FFO and at a -21% discount to NTA value seems to be emerging.
The broker also observes retail is relatively more defensive as an asset class in cyclical downturns and as a result upgrades to Neutral from Underperform.
Retail sales continue to surprise to the upside, supported by strong employment and elevated savings. Target is reduced to $2.79 from $2.85.
Vicinity Centres (VCX) was upgraded to Outperform from Neutral by Macquarie
Macquarie remains attracted to the defensive cash flows of Vicinity Centres. Moreover, retail shopping centres perform well on a relative basis during a cyclical downturn.
The broker reviews the investment assessment and upgrades to Outperform from Neutral.
The balance sheet and hedging profile screen positively against peers, with Macquarie noting gearing is a conservative 26% and hedging 82%, and thus the group is relatively protected from higher rates. Target is raised to $2.01 from $1.87.
In the not-so-good books
Appen Limited (APX) was downgraded to Neutral from Buy by Citi
While the bid by Canadian telco giant Telus International was revoked, Citi sees validation for Appen’s market position and the demand for labelled AI training data. The company is still considered to be an attractive takeover target.
Nonetheless, the broker lowers its rating to Neutral from Buy on earnings risk due to a weaker than expected start to the year and a material 2H earnings skew. The target price falls to $6.60 from $9.15.
Best & Less Group Holdings Limited (BST) was downgraded to Neutral from Outperform by Macquarie
Macquarie assesses increased macro uncertainty and the impact on the consumer apparel segment, noting Best & Less is exposed in a positive way to low prices and repeat purchasing in childrenswear yet has limited trading liquidity and a vulnerability to low-income earners.
All up, the broker chooses to move to Neutral from Outperform and lowers the target to $2.40 from $4.10. Risks to the rating include a change in the macro-outlook, sales and/or margins that lag or exceed expectations.
Charter Hall Long Wale REIT (CLW) was downgraded to Neutral from Outperform by Macquarie
Charter Hall Long WALE REIT has outperformed the sector 2022 to date by 17%, Macquarie observes. The proportion of the leases with CPI-linked escalators has increased to 46% and while this appears resilient the offset is an expected increase in interest costs, the broker adds.
Macquarie expects asset values to increase as of June 2022 as book valuations catch up with transactions in late 2021 and early 2022. Beyond this, caution prevails on the outlook for asset values.
The end result is a downgrade to Neutral from Outperform with the target reduced to $5.11 from $5.23.
GPT Group (GPT) was downgraded to Neutral from Outperform by Macquarie
Macquarie remains attracted to the diversity and defensive nature of GPT Group, anticipating a retail recovery and strong industrial rental growth. Yet the sources of upside are primarily offset by the hedging profile and the rating is downgraded to Neutral from Outperform.
Given potential interest expense headwinds the broker considers the overall outlook has become more challenging on a fundamental basis. Target is reduced to $4.89 from $5.47.
Incitec Pivot Limited (IPL) was downgraded to Hold from Accumulate by Ord Minnett
First half net profit at $384m was sharply ahead of the prior corresponding half’s $36m. This highlighted strong leverage to a rising commodity environment, Ord Minnett suggests.
The share price may have lagged commodity prices in the current cycle because of the operating issues at Waggaman, yet the broker considers earnings momentum has peaked given the recent trajectory of fertiliser prices.
Ord Minnett also suspects uncertainty created by a plan to spin off the explosives segment may weigh on the share price. Rating is downgraded to Hold from Accumulate and the target raised to $3.90 from $3.50.
Transurban Group Limited (TCL) was downgraded to Neutral from Outperform by Credit Suisse
Toll roads may be considered inflation hedges, yet Credit Suisse believes Transurban Group has had a strong run and investors should consider taking profits.
While rates have been hedged and the average cost of the company’s Australian debt is 4%, when debt is refinanced the cost of debt is likely to increase, the broker also observes.
Target is lowered to $13.60 from $14.60.
Universal Store Holdings Limited (UNI) was downgraded to Neutral from Outperform by Macquarie
Macquarie downgrades its rating on Universal Store to Neutral from Outperform and lowers the target to $4.40 from $9.40. The broker attempts to capture increasing macro uncertainty and the potential impact of this on consumer apparel.
Macquarie updates its view and preferences, believing there is scope for some contraction in consumer confidence with the resulting pressure on discretionary retailers.
While the business should benefit from the relaxation of pandemic constraints, and there is a strong balance sheet, a relative lack of trading liquidity leads the broker to be more cautious.
This comes as app downloads fell for the sixth consecutive month in September, notes the broker. Moreover, there’s considered potential for an equity raise, should the international expansion strategy accelerate.
The above was compiled from reports on FNArena. The FNArena database tabulates the views of seven major Australian and international stockbrokers: Citi, Credit Suisse, Macquarie, Morgan Stanley, Morgans, Ord Minnett and UBS. Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.